By Yoon Ja-young
The Fair Trade Commission (FTC) plans to rein in the way holding companies of the nation's large business groups make money as they “abuse” loopholes in the current system to enrich the pockets of controlling families.
According to the FTC report released Tuesday, the country's conglomerates that have adopted the holding company structure are expanding owner families' control, or fill the coffers of the family members by abusing loopholes of the holding company structure.
While holding companies are supposed to earn dividends from shares they hold in other affiliates, the holding companies of the 18 large business groups that have adopted the holding company structure had only 40.8 percent of their total sales come from dividends.
Instead of the dividends, the holding companies were mostly getting royalties, real estate rent, or consulting fees from the group subsidiaries. In the cases of Booyoung, Celltrion Holdings, Halla Holdings, Hankook Tire and Kolon, dividends amounted to less than 20 percent of their total sales last year.
The ratio of intra-group trading was also high at 55.4 percent, fattening the wallets of the owner family members while depriving small suppliers of chances for fair competition.
“The holding company structure has both positive and negative sides, but it seems that the positive effect is overshadowed. The concerns such as irregular expansion of control over the group as well as profiteering by the owner families seems to be turning into reality,” said Shin Bong-sam, head of FTC's business group bureau.
Holding companies also expanded control over the groups by setting up second and third-tier subsidiaries.
Under the holding company structure, businesses can expand control over their affiliates despite controlling a small amount of capital. The system was adopted in 1999 during the Asian financial crisis to substitute the circular shareholding system, as the fall of one affiliate led to the collapse of all other affiliates holding shares of each other in the form of a circle.
Many conglomerates adopted the holding company structure here, which the government recommended to improve the transparency of management. It especially eased restrictions in 2007, such as how much stake a holding company should have in an affiliate or the debt ratio of a holding company. It also provided tax benefits. As a result, the country's major conglomerates including SK, Kumho Asiana and CJ adopted the holding company structure.
The FTC plans to come up with a revision on the holding company structure.
“As the owner families' stakes are concentrated in holding companies, there arises motivation for profiteering. While the holding company structure is one of the options for businesses, the system should be improved to stop their abuses,” Shin said, adding that a revision plan will be submitted to the National Assembly this year after consultation with experts. Some lawmakers also submitted revision bills to strengthen regulations on holding companies.